Audit: Assessments & Taxation Dept. doesn’t inspect property to assess values as often as required; doesn’t audit personal property tax returns or credits

By Charlie Hayward

For Maryland Reporter.com

The state Assessments and Taxation Department hasn’t performed regular physical inspections of individual properties to support property assessments as required by state law for “many years,” legislative auditors found.

The department also did not audit or review business personal property tax returns or homeowner tax credits, and it doesn’t perform sufficient data matches to look for businesses who fail to file personal-property tax returns, according to an audit report released last month.

Maryland’s Department of Assessments and Taxation (DAT) administers real and personal property tax laws, issues corporate charters and collects certain state revenues, such as business gross receipts taxes. It does not collect real property or income taxes and it doesn’t set property tax rates.

The Office of Legislative Audits (OLA)reviewed DAT’s operations for the three years ended July 2012.

OLA also reported that:

• real property values established by DAT’s assessors were not sufficiently documented and values were not double checked;
• many employees whose job duties do not entail changing tax-property data can make changes to those data;
• DAT needs to strengthen its computer network’s general controls, including updating its disaster-recovery plan;
• DAT paid certain contractors without assuring billings were proper and goods and services were actually received and accepted;
• and cash-receipts controls weren’t strong enough to assure all receipts were deposited.

In his response, DAT director Robert Young agreed with the most findings, and said budget and staffing cuts have caused some of them. Young’s response described how the department was going to fix many of the problems.

Physical exterior inspections of individual properties are not performed as frequently as required by state law

DAT has 2.2 million individual real property accounts in Maryland that are supposed to be physically inspected once every three years. It employs 152 field assessors.

DAT told auditors it has not complied with state law requiring physical inspections every three years for “many years” and it has only enough inspectors to physically inspect exteriors of each property every nine years.

DAT had 78 fewer assessors in fiscal year 2012 than in fiscal year 2002. In this same 10-year period, there was an addition of 177,348 new properties to be assessed, the department’s response said. Although DAT has received 22 additional assessor positions in fiscal 2013 and 2014, “those

positions are not sufficient to comply with the physical inspection law,” the department said.

Where DAT can’t physically inspect properties, it performs alternative steps by relying on property sales and construction-permit data as well as using data for neighborhoods, wards or communities to estimate changes to valuation since the previous assessment.

The auditor also noted DAT doesn’t track the total number of properties actually inspected each year, and does not have policies describing what documentation field inspectors must keep to support their inspection work.

The department said it was changing procedures in the local offices to correct these problems.

DAT did not audit or review business personal property tax returns

DAT hasn’t audited, reviewed or entered tax-return data into its tracking systems during the last four years. In addition, DAT made little or no effort to identify businesses that should have filed but did not. Lastly, DAT is not monitoring the effect of real property sales/transfers on past tax credits approved.

OLA audited small samples of tax returns and found a 5% error rate on business tax returns and potential error rates as high as 33% for tax credits.

The department’s response said these problems were again caused by lack of staffing, and it was looking into acquiring a new computer system to allow for electronic filing of personal property tax returns. All businesses, including nonprofits, must file annual returns describing the personal property they own, such as computers and equipment.

Real property assessments were not documented properly and property valuations were not double-checked

Most of DAT’s assessment work is performed in the 24 local assessor offices for the counties and Baltimore City. OLA picked three of 24 local offices and selected small samples within each.

The auditors found each office kept different kinds of documentation, and none of the offices showed uniform standards for reviewing “work product” — another name for documentation showing that assessment amounts in the database agreed with underlying documentation:

1.  One local office reduced land values by $286 million for 16,948 properties, but didn’t keep documents to show why adjustments were made.

2.  Twelve of 39 (31%) commercial property assessments totaling $161 million were either valued based on outdated information or the assessors’ documents showed valuations different from the amounts entered into DAT’s database.

3.  One local office did not have documentation for approximately 9,400 properties valued based on the “Market Value Index” method.

The department said it was revising procedures to fix some of these problems.

Unauthorized workers can modify data in DAT’s Property Database

OLA reported anyone who could access the property database could modify data without approval and could do so without detection. DAT had 424 users authorized to access the property database, and at least 50 were supposed to have “read-only” access, and not allowed to change data. This problem was caused because the contractor who installed the database did not assure users with “read-only” privileges could not modify data.

The department responded that its IT vendor was going to fix this problem by Jan. 15.

OLA also reported DAT was running a database version that was eight versions behind the currently-available version. DAT evidently was paying for upgrades that it didn’t install. That problem was corrected when new servers were installed last summer.

DAT paid contractors but did not assure billings were proper and goods and services were actually received and accepted (Repeat finding)

DAT pays certain contractors without reviewing their bills to assure payment is due. OLA identified $152,000 of potential contractor overpayments. OLA also found that one contract stipulating that DAT make payments based on estimated service could not be properly closed out because DAT did not track the services actually received and will be forced to rely on contractor information.

Cash-receipts procedures weren’t strong enough to assure all receipts were deposited (Repeat finding)

In 2012, DAT collected approximately $2.5 million in cash and $21 million in checks. DAT is supposed to have double checks to assure receipts are recorded in the books and deposited.

OLA’s audit found these checks were not documented and likely were not performed. OLA also reported 14 employees who had incompatible duties, enabling them to intercept cash receipts and make entries in the accounting system to conceal missing cash or checks.

Again, the department has changed procedures to fix the problems.

Charlie Hayward recently retired after 30 years’ experience with performance, IT, and financial auditing of a wide variety of government programs and activities. He can be reached at [email protected].